Canada is woefully unprepared for the fintech tsunami

Canada is woefully unprepared for the fintech tsunami

Our financial sector is navigating monster waves of disruption as it fights to remain a global industry leader. So why isn’t Ottawa captaining a strategic course?

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The buzzword fintech covers a range of financial technologies that enable consumers to access financial services over their mobile phone or the Internet. Through the many fintech innovations introduced over the past five years, retail customers can take out a loan, make a payment, transfer money overseas, or invest their savings electronically. Customers enjoy a better experience at a lower cost by transacting via a simple interface that is easier to navigate than traditional brick-and-mortar businesses. And for many of these services, customers bypass traditional financial intermediaries who have profited from this activity, such as banks, mutual-fund dealers, and money-transfer companies.

While the fintech wave arguably started decades ago, the global financial crisis turned this swell into a tsunami. Technology, the loss of trust and the arrival of mobile-first millennials are driving this paradigm shift in financial services.

Over the past year, the pace of fintech innovations has accelerated as the first generation of technologies that enabled this digital transformation — such as mobile phones, cloud computing and peer-to-peer networks — has combined with newer technologies such as blockchain, machine learning and artificial intelligence.

These technologies not only lower the barriers to entry into banking, but have also opened the door to non-traditional players ranging from small startups to giant technology companies. The question is: How much of the disruption witnessed in other traditional consumer businesses — book and music stores, video rentals, hotels, taxis — will be seen in the financial sector? And what will happen to the incumbents?

The question is: How much of the disruption witnessed in other traditional consumer businesses — book and music stores, video rentals, hotels, taxis — will be seen in the financial sector? And what will happen to the incumbent financial services companies?

As a country, you would think Canada should be well-positioned to benefit from the fintech tsunami due to our leading financial services sector, our highly educated workforce, our diverse and spread-out population and our pool of talented entrepreneurs and investors. But rather than leading, Canada is being held back by a lack of a national strategy and the absence of a fintech champion.

What should Canada be doing? Let’s look at Australia. Like in Canada, the Australian banking sector came through the financial crisis largely unscathed, owing to the same prudent policies, conservative risk-taking and strong leadership. But when it comes to the fintech tsunami hitting our economies, the similarities end there. Australia has an emergency preparedness plan, and Canada does not.

In March 2016, Australia’s treasurer published Backing Australian FinTech, a national strategy that outlined commitments and initiatives being undertaken by the government and other bodies to support and promote Australia’s fintech sector, including creating a FinTech Advisory Group; introducing funding and tax incentives; reforming insolvency laws to encourage angel investment; promoting fintech exports and partnerships; addressing data accessibility and cybersecurity issues; and encouraging government procurement of fintech. The report even has a dedicated website to track progress.

The U.K., Hong Kong and Singapore have published strategies, and in each case the finance minister was behind it. Canada shares the same features they have, but lacks leadership and strategy for the future

The catalyst for the Australian response was perhaps the threat of losing talent. In September 2015, the U.K. government invited nine leading Australian fintechs on an all-expenses-paid trip to London, hoping to convince them to relocate. This followed several years of lobbying by the private sector and regional and city governments. In October 2014, the Committee for Sydney — an independent think tank that champions the city — along with the government of New South Wales had commissioned a critical report on Australia’s fintech sector. In May 2015, these parties established a fintech hub and co-working space in Sydney, called Stone & Chalk. They then formed an industry body called Fintech Australia, which outlined how the federal government could build a thriving fintech ecosystem.

The message was received. In February 2016, Australia’s prime minister established an advisory panel drawn from banks, venture-capital firms and fintech startups, which published the top three obstacles to Australia’s ambitions, namely: a lack of government procurement, the over-regulation of equity crowdfunding and the absence of a regulatory sandbox to help startups navigate the regulatory system. This input led to Australia’s fintech strategy, which Treasurer Morrison backed up with budgeted support. Finally, in December 2016, Australia’s securities regulator launched its regulatory sandbox and innovation hub while pursuing outreach to securities regulators in Europe, Singapore and the United States.

Australia is not alone in publishing a national fintech strategy championed at the highest levels of government. The U.K., Hong Kong and Singapore have each published strategies, and in each case the head of the finance ministry was behind it. What these four countries have in common is their small size relative to their neighbours, their large financial sectors as a share of GDP, their dependence on exports (particularly of financial services), and their vulnerability to shocks from abroad. Canada shares these features, but lacks its leadership and strategy for the future.

At Ivey’s Scotiabank Digital Banking Lab, we clearly see plenty at stake if Canada does not get its act together. In 2016, Canada’s financial sector represented seven per cent of GDP and 4.4 per cent of all jobs in Canada. This important sector is at risk of disruption from abroad, enabled by technologies that eliminate borders and other barriers to entry. It does not cost any more to access a foreign website than a Canadian one. And as shown with the growth of Netflix, Canadians are happy to pay for foreign over domestic content even in a so-called protected industry. While the entry of foreign players may lead to better service for Canadians at a lower cost, it would be infinitely better for Canadians if we developed these fintech abilities domestically and exported them abroad, particularly to the U.S. market.

To accomplish this goal, Canada needs a national strategy. Regional initiatives by provincial governments or municipalities such as Toronto and Montreal — while positive — will not suffice to develop a world-class industry. The elements of Canada’s strategy can be drawn from the plans of other countries such as Australia. All Canada needs is a national champion, and the evidence from other countries points squarely at our finance minister. Bill Morneau, it is time to take the wheel and steer Canada through the fintech tsunami.

Michael R. King is a professor in the Finance Group at the Ivey Business School at Western University, and co-director of Ivey’s Scotiabank Digital Banking Lab. This item first appeared in the Ivey Business Journal.

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